Introduction

I think Hong Kong is very fortunate in the sense that you have not really created a British welfare system. As you look across the world, almost all the developed nations now recognize that in most of the Post-WorldWar period, their welfare systems have been bad with very counter-productive results. What I hope to do today is to suggest ways that you can avoid making the same set of mistakes that were made in the U.S. and other countries. Unless your view of development is that you just want to emulate everything that most developed countries have done in the past, including every disastrous policy that they adopted, then you ought to go ahead to have more welfare, more permissiveness, more handout. You'll make a very miserable class of people by doing that. But then you will be in good company because the U.S. did it, Britain did it, France did it and so forth. I do not think that is exactly the way you want to go.

1996 Reform

In 1996 the US began a rather extensive reform of our welfare system. We started by both parties within our system acknowledging that welfare was bankrupt; it was morally corrupt; it was destructive of the poor. I cannot emphasize it too much. Both parties, the liberal and the conservative, recognized that welfare has desperately failed in the U.S. Beginning with the War on Poverty, we generated one social catastrophe one after another. The most striking of which is that 70 percent of the African American children in the U.S. are now born outside the wedlock. All that directly coincided with the welfare system that we put in place in the U.S.

We started a reform based on the principle that welfare should never be a one-way handout. Dependence is harmful to recipients. A community with a climate of dependence, of receiving something without giving, is a community that is largely unlivable. You are destroying the very people that you are trying to help when you do that.

We decided that we would abandon or try to change the system that would reward parents from having children without marriage. We would abandon the permissive system of simply looking at needs and handing out cash. Based on the idea that everyone in society has something useful to contribute, welfare not only should be but also must be a system of mutual reciprocal responsibility. We do not want to abandon anyone who is in need, but we can insist upon and demand upon constructive behavior on the part of the recipients. This can be done by demanding the recipients to take steps to help themselves, rather than saying the more dysfunctional things you are doing in life. The less you are working, the more children you have outside wedlock, the more you are failing in school, the more stuff we are going to give you. This has been the way conventional welfare had worked before the reform. We had generated with our welfare system populations of dependence. Starting with populations that had stable marriage structure and strong work ethics, over several generations, we created new communities where large cohorts of people were seemingly incapable of working, and where it would be hard to find examples of stable marriages. This was a horrible situation. And we knew that we had to change the system. Instead of rewarding people for taking self-destructive actions in their lives, we would begin to reward them for taking constructive steps to participate in society.

Workfare in Wisconsin

In the mid-1990s, the states in the U.S. began significant reform of their welfare systems. The reform process was accelerated by the passage of national reform in 1996. As a result, there has been an unprecedented drop in the welfare caseload, which has declined by some 50 percent from its peak level in March 1994. Wisconsin is the most successful story showing that serious workfare is highly successful in breaking the debilitating habit of dependence. Before the reform, there were more than 100,000 families on welfare in the state of Wisconsin. Reform started in 1994/95 when most recipients were required to undertake an organized job search immediately before and after enrolling in welfare. The result has been spectacular. The caseload dropped by 90 percent to around 7,000 families. The remaining 7,000 cases are mainly African American mothers located in the inner cities who have the most profound social problems. But even for this group, the caseload has dropped by 75 percent. And the 7,000 families are all performing community service work or engaging in full-time constructive work, mostly in shelter workshops. As the caseload dropped, the poverty rate was cut in half.

How does the Wisconsin system work? It's very simple. When someone comes in and says that "I need welfare, I don't have a job and I have children dependent on me." We would say we would help you, but let us first tell you what you need to do to help yourself. First of all, you will have to spend 9 days in an employment center, 5 to 6 hours a day. We will teach you how to find a job and how to do an interview. We will try to see what skills you have. And do not miss a day. If you miss a day without an excuse, there will be no welfare for you. And then you are going to search for a job. You go to the office which has job offers posted on the board. You are going to see if there is a job for which you can get an interview. You can go for the interview, but after that you have to get back to the office within 2 hours. We are going to supervise you every minute. And if you still cannot find a job, we have phone books and phones hanging around. You can seek in the phone books until you can get a job. And that is what you are going to do for the whole day long until you can get a job. And you are going to do that for 3 weeks. If you, at the end, still cannot get a job, that is ok! You are going to do community service work, like sweeping leaves in the park or cleaning toilets in hospitals, and you are going to do it thirty hours a week. We will assist you, but you are going to contribute back to society. You know what happened? They all get jobs! Of course everyone has something better to do than sweeping leaves. After finding out that they have to do community work, 60 percent of the applicants would just walk out and say they do not need welfare.

The work requirement acts as a gatekeeper. The first thing you have to do in a welfare system is to somehow separate two groups of people. One group of people really need assistance, and another, a larger group of people, do not really need welfare. They simply search for a free handout. How do you separate them? Just ask them to work for their assistance, and you will know who really need help. When 90 percent of the people leave the welfare system, you can give more resources and attention to the smaller number of people left in the system. The work requirement has to be imposed at the very front door. Welfare is not about giving you something for nothing, but helping you get back to the mainstream of society. You have to look for a job day after day in a supervised manner from 9 o'clock in the morning, attending interviews and writing resumes in the evening. Searching for a job becomes much like doing a job. In fact searching for a job over and over again really pushes people into getting real paid jobs. Just asking them to go out to find a job without supervision is not effective.

Benefit levels

The benefit you are going to pay has to be relative to the wage that the recipient is going to get in the real world. If you give a benefit package that is higher than what they are going to get in the real world, they will most likely stay in the welfare system. It is really a simple basic economic idea. The welfare package in the U.S. weighs in US$ 15,000 a year. If you do not have to do anything to get the benefit, there would be more people joining the system. Once the rule is established that welfare benefits must be earned, the attractiveness of welfare would dwindle, and the number of people entering or remaining on welfare would shrink dramatically.

Based on the experience of the U.S., the higher the benefits that you pay out in welfare, the more negative side effects you will have. There are 50 states in the U.S., and each state has different welfare benefits. This allows us to use sophisticated statistical techniques to find out the effects of changing welfare benefits. We have found that a 10 percent increase in the benefit level is correlated with a 15 percent in welfare enrollment. This is not a surprising result, and is based on detailed analyses of data collected over a 25-year period. Another finding which may not be relevant to Hong Kong, but you should better watch out, is that a 20 percent increase in benefit level is correlated with an 8 percent increase in out-of-wedlock births across the entire U.S. One final example that I want to give is the Seattle-Denver income maintenance program. We found in this control experiment that for every additional dollar that we gave in higher welfare benefit, we had a reduction in work effort and earnings of 80 cents. The more money we gave to welfare recipients, the less they would work so that for each additional dollar that we gave them, they would only have an increase of 20 cents in net income.

A lot of people think that welfare dependence is driven by the economy. This is absolutely not true in the U.S. There is very little link up between welfare enrollment and the state of the economy. The determining factor for the number of people on welfare is how tough or how permissive the system is. If you were letting people on easily, without requiring them to do anything, you would have a large number of people on welfare. If you are saying we will only let you on if you take constructive steps for your life, the number of people entering will drop dramatically.

Unwed Mothers

Finally, I want to talk about something that is very important. In 1965, 7 percent of children in the U.S. were born illegitimate. Today 32 percent of American children are born outside the marriage. The collapse of marriage among blacks has been particularly disturbing. At the outset of World War II, the illegitimate birth rate among this group was slightly less than 19 percent. Between 1955 and 1965, it rose slowly from 22 percent to 28 percent. Beginning in the late 1960s, however, the rate of black illegitimate births skyrocketed, reaching 49 percent in 1975 and 70 percent in 1995.

Federal and state governments currently spend roughly 150 billion per year subsidizing single parents and only 150 million to reduce illegitimacy and increase marriage. Consequently, the conventional welfare system has all but destroyed family structure in low-income communities across the U.S. Welfare establishes strong financial disincentives that effectively block the formation of intact two-parent families.

Children born out of wedlock are prone to take part in criminal activities. Studies have shown that they are 22 times more likely to end up in juvenile courts than children in two-parent families. Many of our inner cities are unsafe, and the welfare system is responsible for this deplorable state of affair.

You should be aware of this problem and take steps to prevent it from happening. Welfare payment should not be too generous to unmarried mothers. The thing we have to do is to preserve the institution of marriage. The welfare system should not act as an encouragement to subsidize divorce. It is a stupid idea that we have to pay people not to work and pay people not to get married. This is hard on the taxpayers as well as very hard on the poor themselves. The right way is to draw on their strength, to reward them for taking charge of their lives, but not to indulge them for every mistake that they make.

By Robert Rector